Bond prices and interest rates vary inversely because:

a)Bonds have fixed prices and fixed interest rates in the secondary bond market.

b)Bonds have fixed prices and variable interest rates in the primary bond market.

c)Bonds have fixed interest rates and variable prices in the secondary bond market.

d)Bonds have variable interest rates and fixed prices in the secondary bond market.

In the secondary market, bond prices are set by:

a)The Federal Reserve Bank of New York.

b)Bond dealers and brokers.

c)Investment bankers.

d)Supply and demand in the secondary bond market.

Investments that carry a relatively high risk:

a)have a relatively high rate of return and a relatively low purchase price.

b)have a low rate of return and a low purchase price.

c)have a relatively low rate of return and a relatively high price.

d)have both high returns and high purchase prices relative to alternative investments.

Asymmetric information refers to a situation where:

a)both parties to a transaction have the same information.

b)one party to the transaction has negativeinformation not available to the other party.

c)one party to the transaction is withholding information from the other party despite a legal requirement to reveal that information.

d)Never occurs in regulated markets.

Which money supply measure includes currency and coin in circulation, demand deposits (also called checking accounts or checkable deposits) and travelers checks?

a)M0

b)M1

c) M2

d) M3

When the Federal Reserve enters the secondary bond market and buys bonds, how does that change the market?

a)Buying bonds increases the demand for bonds.

b)A higher demand for bonds, increases the price of bonds.

c)Higher bond prices produce lower interest rates in the bond market.

d)All of the above occur.

The measure of the speed with which an asset can be converted into cash without loss of value is called:

a)Velocity

b)Liquidity

c)Conversion rate

d)Liquidity Preference

Government bonds normally carry lower risk and lower interest rates than corporate bonds because governments:

a)have the power to tax and thus raise revenues.

b)have the power to create money.

c)are normally viewed as more financially stable than corporations.

d)All of the above can be factors.

A bond risk premium is:

a)The higher interest rate that must be paid to attract investors to riskier investments.

b)The additional amount that investors pay bond dealers for lower risk bonds.

c)The higher premiums that high risk drivers pay for auto insurance.

d)None of the above.

The concept of risk structure explains:

a)Why bonds of different risks but identical maturities carry different interest rates.

b)Explains why bonds issued by different entities carry different interest rates.

c)The bond rating system used in the modern economy.

d)All of the above.

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%?

a)0.5%

b)0.8%

c)5.5%

d)1.17%

Default risk:

a)is the probability that a borrower will not pay in full the promised coupon or principal.

b)exists only for the bonds of small corporations.

c)is also known as market risk.

d)is zero for bonds issued by cities and states.

U.S. Treasury securities

a)are considered risk free because their prices never change.

b)have been defaulted on several time in U.S. history.

c)are considered default-risk-free instruments.

d)have a large default risk premium.

The default risk premium is measured:

a)by an index published monthly by the Securities and Exchange Commission.

b)by an index published monthly byThe Wall Street Journal.

c)as the difference between the yield on a non-Treasury security and the yield on a U.S. Treasury security of the same maturity.

d)as the difference between the nominal yield on the security and the real after-tax yield on the security.

Plotting yield against maturity produces:

a)a graph with an upward sloping curve.

b)a graph with an downward sloping curve.

c)the yield curve.

d)the price curve.

A bond that is generally agreed to have higher default risk will experience all of the following EXCEPT:

a)declining demand

b)declining supply

c)higher yield

d)lower price